Currencies | Feb 06 2009
By Chris Shaw
Since its highs around Christmas the euro has lost about 10% against the US dollar thanks to ongoing risk aversion by investors and a narrowing of the EU/US interest rate spread, but in the view of Danske Bank this downtrend for the euro still has further to run.
One reason the weakness will continue in the bank’s view is reserve balancing by the Russian central bank, which is attempting to hold the rouble within a trading band at the same time as the currency is coming under pressure from concerns over Russia’s high current account deficit and capital outflows on the back of investor worries over the level of external liabilities of Russian corporations.
To hold the currency within the central bank’s target band will require intervention in foreign exchange markets according to Danske Bank and it estimates as much as US$5-10 billion per week may be needed to support the Russian currency.
If this proves to be the case Danske Bank suggests the Russian central bank will also be forced to sell almost half as much in euros as it attempts to keep its reserves of foreign exchange balanced. On Danske Bank estimates this implies euro selling of as much as US$5 billion per week over the next several weeks. This would add to the pressures on the euro relative to the US dollar.
